Summary: Financiers call summit to rebuild trust with small businesses, with a code of conduct high on agenda, following Telegraph investigation.
“A Telegraph investigation has highlighted allegations of lenders “profiting” from company failures through so-called “termination fees” … Since the industry is unregulated, companies often feel they have no one to complain to if they feel they have been mistreated… A group of smaller lenders in the industry has responded by …(calling)… for the sector to be regulated….”
Source: The Telegraph 4 January 2013
BM Structured Finance comments:
We know that most SMEs are under capitalised and have always been dependent upon banks giving financial support. But, with the traditional solution of getting a bank loan or overdraft no longer readily available for many businesses in need of working capital, where do they go from here?
There is a growing equity and angel market with entrepreneurial investors looking for ways to make their money work and many new ‘Angel Groups’ are emerging. But, this doesn’t suit everyone. Many directors simply don’t want to give up equity and potentially control of their businesses.
So why not invoice finance? Part of the problem is that it’s just not understood. The product is rarely advertised in the press, unlike other bank products. Business advisers such as accountants and solicitors in general tend to not understand it either. So there is limited knowledge in the public domain and, where there is information about invoice and asset finance, it is often tainted with negative stories that happen within limited situations, but seem to dominate the press.
The truth is, however, that invoice finance remains one of the most under-used financial tools, despite its longevity in the market place.
Having been involved in the sector for over 20 years, it intrigues me that so many businesses don’t understand how asset finance can support growth, and that good use of invoice finance results in a discipline that many small businesses fall short on: good paper trails and solid accounting systems.
This is where the industry brokers can be invaluable. Just as we use an IFA to help us with our pensions and life policies, so a broker can advise and help a business make the right choice.
The issue here is that the industry isn’t regulated and, as highlighted by the Telegraph campaign, this in itself can create uncertainty not only amongst end users, but also amongst the accounting/adviser fraternity.
But, rather than creating regulations within invoice finance – which I believe could complicate matters further, prolong the process and generally be unworkable – the sector would benefit from more transparency within the legal documents, as the terms can be ambiguous. This is potentially part of the reason that accountants generally don’t recommend it as a solution to cash flow and working capital pressures and why some businesses fall short where termination fees are concerned.
The key for all businesses seeking funding is in choosing an adviser who understands the finance market and which banks/lenders offer what products. At usually no cost to them, businesses can work with an independent adviser who will tap into the wide reaching network of financial providers, both in the equity and debt markets, and find the right funding solutions appropriate to their individual needs. They will also check the small print to help to avoid any tricky issues further down the line!
As a consultant acting in an advisory capacity for businesses in need of new funding, I place businesses with the right provider, enabling their individual needs to be met exactly. The benefits to businesses of invoice finance really are significant. But, what is needed here is a more positive profile for the sector … a clear understanding of how flexible this underused product actually is, and how easy it is to avoid unreasonable charges and ensure a fair agreement up front.